SB 998

State Bar Trust Bill -- Spendthrift Protection for Crummey Powerholders

Bill Description

Governor Bush signed SB 998 on May 16, 1997. SB 998 becomes effective September 1, 1997.

SB 998 is the trust code bill pushed by the Real Estate, Probate and Trust Law Section of the State Bar of Texas. It was scaled back during the session so that it makes only one change -- an addition to Section 112.035 of the Texas Trust Code regarding spendthrift protection for crummey powerholders. SB 998 adds new subsection (3) to Section 112.035, to read as follows:
(e) A beneficiary of the trust may not be considered a settlor merely because of a lapse, waiver, or release of the beneficiary's right to withdraw a part of the trust property if the value of the property that could have been withdrawn by exercising the right of withdrawal in any calendar year does not exceed at the time of the lapse, waiver, or release the greater of the amount specified in:

(1) Section 2041(b)(2) or 2514(e), Internal Revenue Code of 1986; or

(2) Section 2503(b), Internal Revenue Code of 1986.

The clear intent of SB 998 was to make it clear that the beneficiary of a spendthrift trust did not lose spendthrift protection merely because of a lapsed crummey power. This goal appears to have been achieved with respect to non-hanging powers, since "the value of the property that could have been withdrawn by exercising the right of withdrawal in any calendar year" never exceeds 5% or $5,000, etc. The same result may not apply in the case of hanging powers, however.

Bill Pargaman of Austin points out that, in many cases where a hanging power is used, while the value of the lapsed power will fall within 5% or $5,000 or the $10,000 annual exclusion, the powerholder's continuing right to withdraw the hung portion may exceed these amounts. One way to read Section 112.035(e) is that "the value of the property that could have been withdrawn by exercising the right of withdrawal in any calendar year" refers to the total value of property subject to the right of withdrawal (i.e., including the hung portion). Thus, once the hung portion equals or exceeds $10,000 (or, perhaps, $20,000 in the case of gift-splitting, although this is not clear), Section 112.035(e)'s safe harbor from creditors may go away.

This is not the result which was intended, and the legislative history may be helpful on this issue.

Another way to read Subsection (e) is that "the value of the property that could have been withdrawn" refers to the "lapse, waiver, or release of the beneficiary's right to withdraw a part of the trust property" -- the 5% or $5,000 lapsed amount -- not the unlapsed amount.

Bill points out that, as he reads the bill, the existence of a "hung" power in excess of $10,000 may jeopardize the spendthrift protection even with respect to the lapsed portion of the trust.

Some comfort can be drawn from the recent Shurley case in the Fifth Circuit (In re Shurley, 1997 U.S. App. LEXIS 14874, June 20, 1997). Construing Texas law, the Fifth Circuit held that a settlor who contributes only part of the corpus of a trust loses spendthrift protection only with respect to that part. (This is an oversimplification, but you get the idea.) Thus, if Shurley holds up, at least the problem is limited to the powerholder's share of contributions to the trust.

The problem can be fixed by inserting these highlighted terms to Subsection (e) in 1999:
(e) A beneficiary of the trust may not be considered a settlor merely because of a lapse, waiver, or release of the beneficiary's right to withdraw a part of the trust property if the value of the property that could have been withdrawn by exercising the right of withdrawal which lapsed, was waived, or was released in any calendar year does not exceed at the time of the lapse, waiver, or release the greater of the amount specified in:

(1) Section 2041(b)(2) or 2514(e), Internal Revenue Code of 1986; or

(2) Section 2503(b), Internal Revenue Code of 1986.




Link to:


Copyright © 1997 by Glenn M. Karisch. This page was last revised on July 18, 1997.